beps reporting and compliance considerations
TRANSCRIPT
BEPS reporting and compliance considerations
32nd Annual TEI-SJSU High Tech Tax InstituteNovember 7-8, 2016
2© 2016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 617946
Presenters
BEPS reporting and compliance considerations Kara Boatman, Principal – KPMG Jay Das, Principa l – Deloitte Tax LLP David Nickson, Principal – PwC Bernadette Pinamont, Director, Chief
Tax Office – Vertex Inc.
3© 2016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 617946
Implemented Draft bills/Public discussion draft Intention to Implement
CbCR Final Legislation
United States
CbCR/MF/LF Final Legislation
Mexico
CbCRDraft legislation
Canada
CbCR/MF/LF Final Legislation
Australia
China
CbCR/MF/LFFinal Legislation
Norway
CbCRFinal Legislation
France
CbCRFinal Legislation
IrelandCbCR/MF/LF
Final Legislation
Japan
CbCRDraft
South Korea
MF/LF Final
South Africa
CbCRIntentions
Nigeria
CbCR/MF/LFIntentions
New Zealand
CbCR/MF/LFIntentions
TaiwanCbCRFinal
Portugal
MF/LF Intention
CbCR/MF/LF Draft Legislation
SwedenCbCR/MF/LF
Draft Legislation
Finland
CbCRDraft legislation
SingaporeIsrael
United Kingdom
CbCRDraft
MF/LF Intention
CbCR/MF/LFIntentions
Chile
Russia
CbCR/MF/LFDraft Legislation
Romania
CbCRIntention
MF/LF Final
CbCRIntentions
Bermuda
Belgium
CbCR/MF/LFFinal Legislation
CbCRDraft legislation
Luxembourg
CbCR/MF/LFIntentions
Malaysia
IndiaCbCRFinal
MF/LF Draft
CbCRDraft
MF/LF Intention
CbCR/MF/LFIntentions
Peru CbCR/LFDraft
MFIntention
CbCR/MFDraft legislation
Uruguay
CbCRFinal
MF/LF Intention
Country implementation summaryBEPS action 13
CbCR/MF/LF Final Legislation
Spain
CbCRIntentions
Jersey
Germany
CbCR/MFDraft
LF Intention
Switzerland
CbCRDraft
MF/LF Intention
CbCRFinal Legislation
Italy
Austria
CbCR/MF/LFFinal Legislation
CbCR/MF/LF Final Legislation
Denmark
CbCR/MF/LF Final Legislation
Netherlands
CbCR/MF/LF Final Legislation
Poland
CbCR/MF/LFIntentions
Indonesia
Source: KPMG International member firms
4© 2016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 617946
BEPS reporting and compliance considerations— Country by Country Reporting
- Do we have to comply? What if we don’t?— Penalties— Audit risk
- Where/when do we need to file?- What about public disclosure?
— Master File- When?- How much information should we include?
— “A” versus “C” report— Value chain analysis: yes or no?
- What about countries that don’t have the same $$ threshold?
5© 2016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 617946
BEPS reporting and compliance considerations (continued)— Local Files
- Centralized versus decentralized approach- When?
— Should we prepare for countries that haven’t yet implemented LF requirements?
- How much information?- What about China?
6© 2016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 617946
Consider a more strategic approach
Recommendations & Stakeholder Communications
BEPS Strategy
Fact Gathering & Documentation
Value Chain Analysis
Transparency Considerations
BEPS Risk Assessment
7© 2016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 617946
What we seeLinear approach
Timing
CbC Master File Local File
8© 2016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 617946
What we’d like to seeIntegrated approach
Timing
Action 13 Strategy
Local File
CbCMaster
File
© 2016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 617946
The KPMG name and logo are registered trademarks or trademarks of KPMG International.
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PwC/VertexPwC/Vertex
Typical challenges ‘at the coal face’Companies initially viewed CbCR as a purely compliance burden, but this has quickly evolved into a broader evaluation of system capability for tax and legal entity reporting
Challenges Themes to investigate
Entity level data
Local variation for intercompany transactions
Complex data and technology landscape
Significant effort required to map management reporting to legal entity activity● Ledger configuration● Alignment legal to tax.● Offline calculations and reallocations.
Statutory accounting processes and other challenges● Timing mismatch of local statutory financial statements as compared to required CbCR
deadlines● Current statutory processes not systemized/centralized● Ledger to entity/branch uniqueness
● Where I/C transactions recorded e.g. retained earnings (or similar) ● Elimination of activity is subject to significant variability
● Multiple disparate local and aggregated ledgers ● Decentralized location for collection, manipulation and management of general ledger and
transactional data● Process related to periodic review and control of legal entity structure● Workflow needed to integrate multiple data sources.
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PwC/VertexPwC/Vertex
Fundamental challenges – 1. tensions between global and local reporting
Local statutory accounts/
tax returns
Global financial
statements
CbCR?Alignment to
local file
Time intensive, and greater system
challenges
Fastercompilation
Reconciliationchallenges on
audit
Local file
Masterfile
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PwC/VertexPwC/Vertex
Fundamental challenges – 2. additional accounting tasks
Aggregated approach to country results build up:
• Addition of P&Ls/balance sheets without elimination
• Deconsolidation/gross-up of financial/operational/taxation results?
• Stripping out ‘negative cost’ in cross allocation processes to identify related party revenues
Anticipated reconciliations and audit trail
• Ability to reconcile the CbCR to:
− local statutory statements − worldwide audited statements − legal entity books − local tax returns − transfer pricing documentation − local international reporting (5471)
• Ability to provide audit trails:
− Auditable trail back to source data− Record retention of the data over multiple years for consistency − Versioning control
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PwC/Vertex
Fundamental challenges – 3. Culture and IT landscape
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Data Management to prepare for the end to end process of CbC reporting may be a challenge for numerous MNCs. Many companies we talk to are initially thinking they can get the data from their ERP and that may or may not be true.
Supporting processes in the controllership function are critical
Business culture, resource availability, and timing of data
Core ERP and Business Intelligence systems capability/configuration to handle data granularity
PwC/Vertex
High Level Data Flow for CbC Reporting
HR systems
Exchange rates
LE/BUmappings
Fixed Asset Systems
Revenue sub ledgers
ERPs
A/P & A/R
Cash taxes
CbCR Table #1
CbCR Table #2
Tax applications
Self service reporting
Provision & compliance tools
Tax data mart(s)
SAP Connector
Oracle Connector
Flat File
ExcelAdd-In
Other ERP Connectors
Active processing
Collected & Loaded Validated & Transformed Reported, Reconciled & Retained
PwC/Vertex
Data & Systems for Reporting & Reconciliations
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G/L & sub-ledgers
HR/Payroll
Fixed Assets
Transfer Pricing Documentation
WW Audited Consolidated Fin’l Stmt
Local Statutory Statements
Tax Provision
US Forms 5471, 8858 and 1118
Country Income Tax Returns
CbC Template Data &
ReconciliationNeeds
IT Systems
• ERPs
• Sub-Ledgers
• Tax Provision & Compliance Software
• HR & Fixed Asset systems
Tax pre-processing
process
G/L BU
Legal EntityBooks
Country
Country Consolidations
Reconciliations
PwC/Vertex
Further considerations
Data in multiple source systems with different formats and different meanings.
Data errors, identified too late in the process, increase
risk.
Data translation (from Finance view to Tax view) is complex
and error prone if done manually
Accurate data translations• Business Unit and Cost Center financial data
aggregated and consolidated • Financial details translated as necessary to
Parent MNE reporting currency, by legal entity and by country
• HR and Fixed Asset data aggregated by Country
• Business Activity data by legal entity• In a repeatable, reliable, and accurate process
Data Errors• Early Detection: find errors early before final reports
and filings are completed• Account Balances: Rules can highlight accounts that
don’t balance• Easily Determine Root Cause: Drill down to lowest
level of detail to determine source of problem ccuratedata translations
Data and Systems• Degree of centralization of ERP and Business Intelligence systems • Degree of standardization in the charts of accounts • Stable platform of centralized and standardized system and processes • GAAP rules of the local companies can be easily converted to parent company
GAAP rules
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PwC/Vertex
Key Questions
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• Single instance globally or fragmented?
• Stable platform, or ‘in transition’ (ERP rollout or acquisitive behavior)
• System optimized for legal entity reporting; reconciliation capability local GAAP to U.S?
• Standardized chart of accounts or ERP templates?
• Degree of BI centralization, maturity of reporting, and business support available
• Difference between management and legal entity accounting…and reconciliation capability
ERP and Business intelligence landscape
• Degree of centralization and cultural values• Maturity and stability level of systems?• Existing processes to leverage (5471s, provision,
management allocations, FTC, tax cashflowforecasting)
• Plan for data mapping & reconciliations• Plan for workflow approach (build v buy, insource
v outsource)• Does the complexity of your corporate structure
require that you run several trials?• Record Retention
Current tax processes
PwC/Vertex
Learnings & Best Practice Recommendations
It is critical to create cross-organization momentum
- Identify drivers in other functions that align with the CbC agenda (e.g. FP&A and insights into fully loaded profitability/customer analysis)
- Leverage organizational investments in IT wherever possible
- Focus on time/resource impacts for the finance organization to support analysis, as a driver to support the investment in technology
- Engage with shared services/GBS/GFS type functions and start the ‘service level agreement’ discussion early
- Present the issues as related to transparency and intercompany accounting/reporting as opposed to ‘tax compliance’
- Elevate the reputation and confidentiality risk issues associated with the granular reporting of profitability data
- Establish a task force/sponsorship group across tax, finance, and IT
- Maximize the use of technology for data collection, validation, transformation, and reconciliation to ensure overall transfer pricing story is properly told and to provide an audit trail.
- Start preparing now
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Introduction
• In this presentation, we will discuss the common issues companies experience when navigating Country by Country (“CbC”) Reporting, Master File (“MF”) and Local File (“LF”) filing requirements.
• The common issues can be classified in the following categories:• CbC Reporting Interpretation • Technical Issues• Gray areas in the CbC reporting that are
addressed in MF/LF• Gray areas in MF/LF
• The following slides showcase a list of sample issues Clients has encountered while preparing for the CbC, MF and LF filing.
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CbC Reporting Interpretation Issues
• Interpretation of “Total accrued tax expense” in CbC Reporting• Should total accrued tax expense be net of foreign tax credits for US tax purposes? • Should deferred taxes and provisions of uncertain tax liabilities be excluded from total accrued
tax expense?
• Treatment of stateless income in CBC reporting• How should income from the various types of entities such as the following be treated for
purposes of CbC reporting? • Reverse Hybrid• Cayman Company• Partnership • Branch registered in Ireland with no income tax
• Treatment of related party revenues for CbC and MF purposes• Should revenue from entities, where Clients holds less than 50% of its ownership, be included in
the US CbC reporting.
• Should dividend income be excluded from profit/loss before tax?• There were no clear guidance on whether dividend income should be included in profit/loss
before tax in the CbC reporting.
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Technical Issues
• Which jurisdictions allow for surrogate parent filing• To date, the U.S. income tax treaty and tax information exchange agreement (“TIEA”) network cover
approximately 95+ countries. However prior to automatic exchanging information, the IRS must enter into a competent authority (“CA”) arrangement specifying the rules under which such exchange will take place. For jurisdictions within the US treaty and TIEA network that the US does not enter into CA arrangement with for the exchange of CbC info, they may require secondary filing of the CbC report under local rules similar to the OECD model legislation.
• Currently there are concerns around exchange of information with/from Chile, China, Singapore, Switzerland and Taiwan, where Clients have significant businesses.
• China for example, is an “in network” country but since it does not have a BDI automatic exchange relationship with the US under FATCA, Clients China may be required to meet local filing requirements in China.
• To avoid additional local filing requirements, Clients could utilize a parent that have passed legislation or otherwise indicated that they are willing to serve as a surrogate.
• May need to conduct analysis to compare between US treaty network and the networks of the following potential surrogate countries:
• Mexico• Japan• Australia• Canada• UK • Netherlands
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Gray areas in the CbC reporting which has to be outlined in the master file/local file.
• Should LF be provided on an entity by entity basis or aggregated for the entire Clients business operation in that jurisdiction?
• These are done through on a country by country basis to understand local filing requirements for respective jurisdictions.
• Reporting contract labor in CbC and MF/LF• US CBC regulation §1.6038-4(d)(3)(iii) writes that “independent contractors that participate in the
ordinary operating activities of a constituent entity may be considered employees of such constituent entity.” Therefore do companies have the flexibility or exclude contract labors in the reporting of total employees?
• Main Business Activity: Should companies check one or multiple boxes in CbC Reporting form if the entity is involved in multiple business lines?
• Do business lines reported in the CbC Reporting form need to agree with the descriptions in the MF.
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Gray areas in MF/LF
• Clarification on MF requirements and presentation of the legal ownership chart in the MF
• Should the organizational chart include holding and dormant entities? Should the entities included in the organizational chart reconcile with entities listed in the CbC reporting?
• Local file reporting requirements for holding companies and dormant entities• What are the minimum LF reporting requirements for holding and dormant
companies that perform little to no functions..
• Clarification on MF requirements for top 5 products/service offerings• What is the definition of product line? Can it be interpreted that Client’s top 5
business segments are the top 5 products/ service offerings?
• Should intangibles be reported for business segments that account for less than 5% of Client’s overall business?
• Should constituent entities such as business unit’s intangibles be reported in the MF even though these entities account for less than 5% of Client’s overall business?
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